RIL Q4 results preview: Investors have a lot to be worried about

A day before Reliance Industries, India’s largest private-sector conglomerate, announces its fourth-quarter results, the stock is treading water, underlining the cautious mood of investors.

There’s good reason for that. Analysts predict that the company’s profits could fall up to 29 percent in the January-March quarter from a year ago, the worst decline in three years.

There are three reasons for this. First is the declining output from the KG-D6 basinand its continuing legal battles with the government over the same. The company has blamed technical reasons for output from the basin slipping to about 52 mmscmd (Million Metric Standard Cubic Meter Per Day) from the originally estimated 80 mmscmd.

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Since then, the government, which awarded the basin for exploration to the company, and Reliance have been in constant dispute over everything from estimation of production costs to the exact proportion of profit-sharing with the government.

The second problem is the risk of declining gross refining margins for the company. The refining margin is is the difference between total value of petroleum products and price of crude.

Bank of America Merrill Lynch estimates that RIL’s gross refining margin could come in at $6.5 per barrel, which is $1.1 per barrel below benchmark Singapore GRMs and 30 percent lower than last-year’s figure for the same period. It is also 4 percent lower than last quarter’s GRM.

Even RIL’s petrochemical margins could be hit by 30 percent compared to last year, the brokerage predicts.

And third, RIL has not managed to effectively utilise the mammoth Rs 75,000 crore in cash it boasted at the end of December 2011. Even after it announced a highly-awaited share buyback, it managed to spend just Rs 350 crore against a budgeted Rs 10,000 crore.

Not surprisingly, analysts are glum about Reliance’s prospects. In a recent report, Kokak Insistutional Securities says that is is not optimistic about the company second coming in telecom, given the high license fees and intensely competitive business environment; neither is it upbeat on the company’s bet on US shale gas, given the very low gas prices in the US. “Small investments in hotels and media show lack of focus, especially given limited progress in core businesses,” it says.

JP Morgan also re initiated coverage on the stock this week ahead of the results with an ‘underweight’ rating. It issued a “negative” outlook on Reliance’s refining and petrochemicals businesses, adding that “sustained” weakness in its downstream business would cause earnings downgrades".

Top-ranked analysts from StarMine are even more pessimistic: they forecast net profit at Rs 4,258 crore, nearly 7 percent below the overall consensus figure.

Clearly, several concerns will weigh on the stock when the Reliance’s results are announced on 21 April. Nevertheless, don’t expect a massive sell-off as the stock continues to gain support from the buyback proposal which will continue until the end of this year.

The stock closed 1 percent down at Rs 741.75.